Why do business fail? Given the current state of the economy, I would say it’s a safe bet that many of you have pondered the answer to this question as we watch companies close their doors on a daily basis. The unfortunate reality is that well more than 50% of all new business ventures fail within the first three years, and especially during tough economic times, many mature, even once category dominant companies fail over time. In today’s post I’ll share my thoughts as to the real number one reason why businesses fail – It’s not what you think…
I don’t believe there’s too much debate among “the experts” that the most frequently cited cause of business failure is a lack of capital. While the recent events on Wall St might lead you to believe it’s true, capital while clearly a nice luxury, doesn’t make a large operating reserve a necessity (here I go picking on “the experts” again). You see, I have witnessed well capitalized ventures fail miserably, and severely under-capitalized ventures eventually grow into category dominant brands. A lack of capital can provide a socially acceptable excuse for business failure, but it is not the reason businesses fail.
Before we go any further, let’s just put a fork in the lack of capital excuse…While it may be every entrepreneur’s fantasy to launch their business with 5 years operating reserves in the bank, the reality is that this very rarely happens. Additionally, it is not really the amount of capital a venture secures, but rather the relationship between the amount of capital raised and identified capital requirements…as we’ve all watched in recent months, the real issue is not how much capital you have, but rather how effectively the capital is deployed and managed.
I would go so far as to say that well capitalized start-ups may have a higher mortality rate than their thinly capitalized counterparts. When capital is a scarce commodity, each spending or investment decision tends to be made with great care. A lack of capital forces entrepreneurs to prioritize their decisions, and to focus their efforts on high impact areas. Well capitalized ventures on the other hand often make ill-advised decisions, and frivolous expenditures that result in lower margins and increased commitments to overhead creating unnecessary operational burdens on the enterprise.
The reality is that you can ask 10 different people why businesses fail, and you’ll likely receive 10 different answers. While each answer could well be a contributing factor to the demise of a business venture, there is in my opinion one singular cause for all business failures…a lack of sound leadership. When I refer to leadership in today’s context, I’m pointing specifically to executive leadership as represented by the entrepreneur or CEO. In the 10 points listed below I’ll examine some of the more common reasons attributed to business failure, and I’ll likewise assess the roles and responsibilities of leadership as they pertain to the following reasons:
- Lack of Vision: It is the role of the CEO to clearly define and communicate the corporate vision. If there is no vision, a flawed vision, or a poorly communicated vision, the responsibility falls squarely in the lap of executive leadership. Moreover, if the vision is not in alignment with the corporate values there will also be troubled waters ahead. No vision equals no leadership…
- Lack of Execution: Everything boils down to execution, and insuring a certainty of execution is job number one for executive leadership. If as an entrepreneur or CEO you don’t focus on deploying the necessary talent and resources to insure that the largest risks are adequately managed, or that the biggest opportunities are exploited, then you have a leadership team destined for failure.
- Lack of Capital: Raising, deploying, and managing capital is ultimately the responsibility of leadership. The amount of capital required to run a business is based upon how the business is operated. Therefore if leadership operates the business without consideration for capital constraints, or irrespective of capital formation issues, then the blame should fall squarely on the shoulders of leadership. Morever, if executive leadership squanders capital through irresponsible acts, there will also be severe consequences.
- Lack of Management: It is the job of leadership to recruit, mentor, deploy, and retain management talent. If the management team is not getting the job done that is the fault off executive leadership.
- Lack of Sales: A lack of sales is ultimately attributable to a lack of leadership. Pricing, positioning, branding, distribution, or any number of other metrics tied to sales force productivity all rest with executive leadership.
- No Market: Good leadership pursues sound market opportunities. Pursuing the wrong market, or pursuing the right market improperly is also the fault of executive leadership.
- Poor Professional Advice: Nobody has cornered the market on knowledge and wisdom. If leadership doesn’t seek out the best quality advice available to them,then they will likely not make the best decisions. All CEOs and entrepreneurs need top quality professional advisers.
- The Inability to Attract and Retain Talent: Great leaders surround themselves with great talent. They understand that talent begets more talent. If your company doesn’t possess the talent it needs to achieve its business objectives no one is to blame but leadership.
- Competitive Awareness: A business does not need to be the category dominant player to avoid failure. That being said, it is the leadership’s responsibility to understand the competitive landscape and navigate it successfully.
- Obsolescence or Market Changes: If executive leadership is in touch with the market it will be difficult to be caught by surprise. It is the responsibility of executive leadership to make sure that the proper attention is given to innovation, business intelligence and market research to manage the risk of obsolescence and market changes.
Bottom line…the talent that it takes to operate at the C-suite level is matched only by the amount of responsibility that goes with the territory. If it was an easy job everyone would be a CEO or entrepreneur.
Community Futures is not strictly in the business of loaning money to entrepreneurs – we really want to help build successful businesses that will have a positive and lasting impact on the economies of rural communities. So, anything we can do to help reduce the risks is a good thing – including sharing our wisdom about why some businesses fail while others succeed.